What happened

Shares of Southwest Airlines (NYSE:LUV) climbed 22.1% in January, according to data provided by S&P Global Market Intelligence, as strong demand led to record results in 2018 and cushioned what was already the industry's best balance sheet. January's strong performance reversed a downward trend in Southwest's share price, and the stock made back most of what was lost in the final three months of 2018.

LUV Chart

LUV share price since Oct. 1 2018 data by YCharts.

So what

Southwest mid-month reported adjusted fourth-quarter earnings of $1.17 per share, topping the $1.07 consensus estimate, on revenue that increased by 8.5% year over year to $5.7 billion, ahead of consensus. The company said that it generated a record $3.1 billion in free cash flow in 2018, ending the year with nearly $3.7 billion in cash and short-term investments and an additional $1 billion available in an unsecured revolving credit line.

Check out the latest earnings call transcript for Southwest.

A Southwest-branded Boeing 737 MAX in flight

A Southwest-branded Boeing 737 MAX in flight. Image source: Boeing.

Southwest did warn to expect cost inflation in the early part of 2019, tied to the company's push to begin service to Hawaii and the introduction of new jets. The airline forecasts unit costs excluding fuel to be up 6% in the current quarter compared to the prior-year period, with Hawaii start-up costs, higher airport costs, and timing of maintenance schedules the primary drivers.

The airline does expect revenue per available seat mile, an important industry metric, to increase by upwards of 5% year over year in the quarter, in part thanks to an easy comparison to 2018 when Southwest was forced to juggle its schedule as it retired its older planes.

Now what

Hawaii will be the focus of Southwest in 2019, at first primarily on the cost side but by the second half of the year hopefully becoming an important driver of growth. The company will need that to happen, as it will likely find cost creep difficult to contain.

Southwest is still a best-in-class operator, but gone are the days when the company could provoke fare wars without fear of hurting profitability. In fact, the rise of ultra-low-cost carriers means the company needs to remain disciplined, where once it could compete largely on price.

Long-term shareholders should continue to benefit from the company's outstanding balance sheet and its willingness to return capital to investors -- Southwest returned $2.3 billion in 2018 through dividends and share repurchases -- but don't expect the sort of share-price gains experienced in January to be repeated throughout the year.